Question

On May 15, Windy Co., purchases $87,000 of supplies; payment is not required until June 14. What action should be taken by Windy on May 15?

Multiple Choice

• No journal entry is required; this transaction should not be recorded until the payment is made.

• A journal entry that includes a debit to Prepaid Expenses should be prepared.

• A journal entry that includes a debit to Accounts Payable should be prepared.

• A journal entry that includes a credit to Accounts Payable should be prepared.

The gross profit equation is:

Multiple Choice

• (Sales Revenue − Sales Returns & Allowances − Sales Discounts) − Cost of Goods Sold.

• (Sales Revenue − Sales Returns & Allowances − Sales Discounts) + Cost of Goods Sold.

• (Sales Revenue + Sales Returns & Allowances) − Cost of Goods Sold.

• (Sales + Sales Discounts) − Cost of Goods Sold.

Answer 1

Question 1: The correct answer is "A journal entry that includes a credit to Accounts Payable should be prepared"

Reason: Following journal entry is passed when supplies are purchased on credit:

Date	Account title and explanations	Debit	Credit
May-15	Supplies	87,000
	Accounts Payable		87,000
	(Being purchase of supplies on credit)

Question 2: The correct answer is "(Sales Revenue − Sales Returns & Allowances − Sales Discounts) − Cost of Goods Sold"

Reason:

The formula for gross profit is: Gross Profit = Net Sales - Cost of goods sold

Net sales are computed using the following formula: Net sales = Sales - Sales returns and allowances - Sales discoutns

Hence combining both formulas, we get the answer as:

Gross Profit = (Sales Revenue − Sales Returns & Allowances − Sales Discounts) − Cost of Goods Sold